GLG Investor Insights: FINRA’s Mission to Facilitate Vibrant Capital Markets
The Financial Industry Regulatory Authority (FINRA), a government-authorized not-for-profit organization that oversees U.S. broker-dealers, is “dedicated to protecting investors and safeguarding market integrity in a manner that facilitates vibrant capital markets.” Regulating more than 624,000 brokers nationwide and monitoring billions of daily market events, FINRA achieves its objectives through various means that are structured to keep investors informed and permit aggrieved investors to pursue recovery of their investment losses through securities arbitration.
FINRA wants investors to participate in the market with confidence. This is achieved by (1) offering investors basic protections through a robust regulatory framework, (2) ensuring that anyone who sells securities products has been tested, qualified, and licensed, (3) requiring that product advertisements are not misleading, (4) requiring that securities products chosen for an investor are suitable for that individual, and (5) mandating that complete disclosures are made before an investment is purchased.
While not a government agency, FINRA does have enforcement power over its members. Data available from 2018 indicates that, in that year, FINRA brought 921 disciplinary actions against brokers and firms allegedly engaged in unethical behavior, levied $61 million in fines, ordered $25.5 million in restitution, and referred more than 900 fraud and insider trading cases to the U.S. Securities and Exchange Commission (SEC).
Losses incurred by investors are a major focus of FINRA, and in an effort to provide the investing public with valuable information to help avoid such losses caused by broker malfeasance or negligence, a webpage called BrokerCheck is available. BrokerCheck is a free tool to research the background and experience of securities professionals and broker-dealer firms. By entering the name or registration number (CRD#) of a broker or firm, an investor can obtain relevant information including employment history, regulatory actions, licensing information, customer complaints, and arbitration cases and outcomes, if any.
Additionally, if an investor thinks a broker or brokerage firm has somehow mismanaged his or her account, including, for example, by investing in unsuitable financial products, FINRA provides an arbitration forum designed to be more efficient and less costly than a traditional lawsuit filed in a court of law. Within the context of its securities arbitration forum, FINRA also provides for voluntary mediation as an option to seek resolution of some investor disputes.
FINRA arbitration provides a method of dispute resolution that is typically faster, less complex, and less expensive than traditional litigation. Procedurally, within the context of a customer dispute, a FINRA arbitration is commenced when the investor (known as the claimant) files a Statement of Claim seeking relief, most typically monetary damages due to investment losses suffered. The parties to a FINRA dispute – the claimant and the respondent (akin to a plaintiff and defendant in a traditional lawsuit) – have the opportunity to select arbitrators to be assigned to their case (in a manner somewhat analogous to jury selection). If the dispute cannot be resolved through informal settlement negotiations or mediation, then the matter will eventually come before the panel of arbitrators to be decided at a formal hearing. Following the hearing, the arbitration panel will decide on the issues presented and render a decision on the merits, known as an “award” (a final and binding decision).
In the next installment of GLG Investor Insights, we will explore in more detail the FINRA arbitration process, from start to finish, as well as address some of the more common types of claims that may be raised by aggrieved investors through securities arbitration proceedings before FINRA.